JEFF OSTROWSKI Bankrate.com (TNS)
During the record housing boom of the past two years, a drastic shortage of homes for sale has plagued buyers and delighted sellers. Now the squeeze is slowly easing – a change that could mark the start of a long-awaited cooling in the white-hot housing market.
The abnormal conditions of the last two years have been brutal for buyers. Because demand for homes has exceeded supply by such a margin, buyers have faced steep price increases month after month. In desperation, many homebuyers have engaged in bidding wars and even waived contingencies for appraisals and inspections.
Housing economists measure the stock of homes for sale in months of supply. In January, the number was just 1.6 months, a record high, according to the National Association of Realtors. The figure has increased every month since, reaching 1.7 months in February, 1.9 months in March and 2.2 months in April.
The real estate rule of thumb says that a balanced market, which favors neither buyers nor sellers, is characterized by five to six months of supply. So it’s still a seller’s market, but the picture looks less skewed today than a few months ago.
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“Housing supply has started to improve, albeit at an extremely slow pace,” Lawrence Yun, chief economist for the National Association of Realtors, said in a statement.
Joel Kan, an economist at the Mortgage Bankers Association, is also both encouraged and disappointed by stock trends. “With just over two months of supply, inventory is still extremely low by historical standards, and the recent slowdown in residential construction activity could prolong this shortage,” he says.
Why the inventory shortage is easing
The stock of homes for sale has widened in part because home prices are out of reach, dampening demand. The median price of an existing home sold in April was $391,200, a record high and up 15% from a year ago, according to the National Association of Realtors. However, the number of sales fell slightly.
Price increases, combined with a recent spike in mortgage rates, have created affordability issues for buyers. The average cost of a 30-year mortgage was just 3% in August 2021, according to Bankrate’s national survey of lenders. By mid-May, the number had jumped to 5.45%. “It forces people to take a break,” Pappas says.
Andrew Sachs, a Keller Williams broker in Newtown, Connecticut, says he’s started noticing signs of a cooler market. “There are fewer bidding wars. Maybe the seller gets the ask price, but he doesn’t get eight bids that push him above the ask price,” he says. “A salesman can’t ask for the world and get it, so everything will be more negotiable.”
Over the past two years, buyers who wanted to strike a deal have been virtually forced to make aggressive offers on multiple properties. Now the pendulum could swing back in their favor. “We are seeing pockets of normalization,” Sachs says. “The more people who can buy homes, the healthier the overall economy will be.”
Why housing supply is so far from demand
Some reasons why the housing shortage has become so extreme:
Builders can’t build fast enough to keep up with demand: Homebuilders slumped after the last crash, and they never fully reached pre-2007 levels. Now there’s no way for them to buy land and get regulatory approvals fast enough to stifle demand. While they build as much as they can, the massive suburban developments that were common from 1950 to 2010 are now rare.
Demographic trends create new buyers: Demand for homes is strong on many fronts. Many Americans who already owned homes decided during the pandemic that they needed bigger homes. Millennials, a huge group, are now in their prime buying years. And Hispanic buyers are a young and growing demographic who are also keen on home ownership.
The usual supply tap is turned off: In a counter-intuitive warm market outcome, homeowners are not eager to sell because they know they will have to fight to find another property. Plus, there are almost no foreclosures these days, taking a small but reliable source of homes off the market.